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As a general rule, the most successful man in life is the man who has
the best information
When looking for an investment the approach I take involves looking at
the global - big picture - conditions. I study trends, read the news,
basically watch and listen to what’s going on in the world. Then I
study the different sectors in order to select the one that I think is going
to match up well with, what I think is, the soon to be overriding theme. This is top
down investing.
The second part of my search for the dominant investment is a bottom
up approach. This is where I find individual companies in the specific sector
I have chosen to invest in. I pick the company I want to invest my money in
based on the quality of its management team.
If you’ve done your homework all the necessary ingredients for a
potentially successful investment - the right place/time and a high quality
management team with projects that need to be worked - should be in place.
Always remember everything about a company flows from management - the
ability to find a project or have projects or joint ventures (JV) offered to
the company, development of the project in a timely efficient manner,
financings done at a higher and higher share price, control over the share
structure along with management interests aligned with shareholder
interest.
Three Sides to Every Management Team
It’s a fact in the mining world that most discoveries are made
by a) junior mining companies and b) old time individual prospectors. Why are
the juniors so successful at finding mines? Well the good ones are lean mean
boots on the ground exploration and development companies run by people who
have been out there and know what it takes. They know how to raise money from
the suits and they know how to get the story out to the retail investor.
They are not tied up in bureaucratic red tape and can make the
important decisions without commissioning a six month study or running it up
through 12 layers of pencil pushers and then sitting on their butts waiting
for an answer while somebody else scoops the prize. They can and do make up
their minds very quickly and can execute immediately on plans.
The most successful management teams have three complementary but very
different sides. The first side of the team is the people who can find the
quality projects and who have the technical expertise to explore, develop and
advance them. But a good all round junior isn’t comprised of only these
people - there has to be more.
The second side of a successful team are the
members who have the ability to make deals for projects, go into the board
room and sell the story to the institutional investor, the suits, and raise
the money needed for acquisitions, exploration and development.
The third side of the team are the people
with the ability to tell the story to retail investors.
Officers of the company make up side one and side two, they should be
experienced business persons, geologists, mining engineers, lawyers and
accountants. The president and or the chief executive officer should be the
public face and voice of the company. They do not have to be geologists or
engineers, they do have to be smart businessmen and strong salesmen or women
who can make the best deal possible on acquisitions and go out and sell their
company to the different brokerage houses who can than raise the needed money
from their own clients to acquire, explore and hopefully advance the
company’s projects.
Do not make the mistake of thinking side one and side two management
can do side three. Giving dog & pony shows to a group of brokers and
mining analysts, an institution or group of high net worth individuals, being
on TV and doing interviews is a much different skill set than running a promo
campaign to retail investors and actually picking up a phone and talking to
them all day.
Make sure the company you are interested in has all three skill sets.
There’s nothing worse than sitting in a junior with an excellent
project but no money to advance it and a market cap that should be many times
higher than it is due to a lack of or just plain terrible promotion efforts.
Company stage – risk v. reward
Only you can decide the level of risk you can tolerate and how much
patience you have to sit while developments, the story,
plays out.
The most upside (and by far the greatest risk) comes from buying a
junior when they are exploring and make an initial discovery. Great drill
assay results can send a juniors share price skyrocketing. The reverse can
also be true. Junior explorers, the green field plays, are the riskiest plays
by far. Strike out on assay results and it could be goodbye to a share price
rise for a very long time - till the company finds another project they can
work on. If you’re buying into this kind of play make sure the company
has another fallback project in its portfolio.
My favorite stage junior is a junior in the post discovery resource
definition stage (also known as brown field stage companies). These companies
have all ready found something, the share price has settled back after the
initial discovery (never chase a company whose share price has already
exploded, the share price has had its run, for now the moneys been made. I
try and enter after the excitement has died down and the share price has
settled back) and the company is going in to see what they have and hopefully
produce a 43-101 compliant resource estimate and build upon it. The risk has
been greatly reduced, the waiting time for a discovery non-existent and the
reward very nice considering the much lower amount of risk.
For nearer term producers - for those further down the development
path towards a mine - you have:
- Preliminary
Economic Assessment (PEA) or scoping studies are done to examine
potential mining scenarios and economic parameters - A PEA or scoping
study is an important milestone for a mineral project, it’s the
first step in a company’s economic and technical examination
of a proposed mine
- Preliminary
feasibility studies or pre-feasibility studies are more detailed than
PEA’s and are used to determine whether or not to proceed with a
detailed feasibility study. They are also used as a reality check to
determine areas within the project that require more attention
- Feasibility
studies will determine definitively whether or not to proceed with the
project. A feasibility study or bankable feasibility provides budget
figures for the project and will be the basis for raising capital to
build the mine
Remember all these different stage studies are only yes/no decisions on
whether to move to the next stage. NONE of them mean you are going mining,
there’s no mine till every stage is completed, permits approved and the
necessary financing has been arranged.
Because these companies are well advanced along the development path a
lot of the guesswork about grade, size, costs and metallurgy have been taken
out of the equation for us. They have done sufficient work to give investors
a certain level of confidence that their project will successfully move
towards being a mine. The later stage companies (those doing feasibility,
permitting and money raising) can have an excellent entry point for investors
- they often enter a quiet period when they are doing the advanced studies
and raising money to go into production. They often base (a flat share price)
for quite a while through this period - possibly a good time for accumulation
of their shares if you believe in the story. After the money is raised for
production investors can see they are going mining - cash flow is just over the
horizon - and the share price will often break out of its trading range.
With producers you have to look at the balance sheet, consider their
plans for the future and judge for yourself the ability to meet those plans.
Remember cash flow is king, but can they grow that cash flow? These large
well established producers have the least risk and the least upside. But
gains could be steady and maybe they pay a dividend.
Conclusion
I spend the majority of my due diligence time and effort on:
- A top down
theme - discover the dominant overall global theme(s)
- Bottom up
searches - find the companies involved at the stage your comfortable
investing in
Is a global theme - top down, bottom up investing and the best
management teams you can find, in the soon to be hottest sectors, - on your
radar screen?
If not, maybe it should be.
Richard Mills
Aheadoftheherd.com
Richard is host of www.aheadoftheherd.com and invests in the junior resource sector. His
articles have been published on over 60 websites including - Wall Street
Journal, 24hGold, Kitco, USAToday,
Safehaven, SeekingAlpha,
The Gold/Energy Reports, Gold-Eagle and Financial Sense. If you're interested
in learning more about specific junior gold/silver stocks and the junior
resource market in general please come and visit his site at
www.aheadoftheherd.com
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